March 30, 2011 (Chris Moore)
Seven agencies of the federal government jointly released the risk retention proposal mandated in the Dodd-Frank Refinance Reform Bill. The 233 page report defines “Qualified Residential Mortgages (QRM)” and provides additional guidance on requirements for commercial real estate and automobile loans.
A QRM is a home loan that would exempt a mortgage lender from a 5 percent retention in each home loan that it originates and is packaged for securitization. If all the loan qualifications meet or exceed the requirements of a QRM, the bank would no longer be required to retain the 5 percent share of the loan and would have no future risk if the borrower should default.
Here’s a brief summary from the report that details what qualifies as a QRM:
– A QRM must be secured by a first lien mortgage only, cannot exceed 30 years and must be a one-to-four family property.
– The proposed rule prohibits the use of a junior lien in conjunction with a QRM to purchase home.
– A mortgage loan could qualify as a QRM only if the borrower was not currently 30 or more days past due, in whole or in part, on any debt obligation, and the borrower had not been 60 or more days past due, in whole or in part, on any debt obligation within the preceding 24 months. Further, a borrower must not have, within the preceding 36 months, been a debtor in a bankruptcy proceeding, had property repossessed or foreclosed upon, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a Federal or State judgment for collection of any unpaid debt.
– The proposed rules would prohibit QRMs from having, among other features, payment terms that allow interest-only payments or negative amortization. Borrowers would be prohibited from deferring interest or repayment of principal. “Balloon” payment loans would also be prohibited.
– Both fixed rate and adjustable rate mortgages may qualify (ARM) as a QRM, however an ARMs interest rates would be restricted to no more than a two percent increase in any twelve month period and six percent for the life of the loan.
– Creditors who offer a loan with a prepayment penalty would also have to offer a loan without a prepayment penalty.
– Points and fees for a QRM may not exceed three percent of the total loan amount.
– 20 percent down payment requirement. There are various rules based upon the appraised value of the home…too many to list, but they can found on page 80.
– Debt ratio cannot exceed 28 percent for the house payment and 36 percent for total obligations.
– A QRM could not be assumable by any person who was not a borrower under the original mortgage transaction.
The proposal also sets forth policies in regards to mortgage servicers responsibility in the event of a default.
At this time, while Freddie Mac and Fannie Mae are under government conservatorship, they will be exempt from the QRM requirement, as will FHA and VA loans, which altogether currently make up 87 percent of all mortgage loans originated. If implemented today, QRM would only apply to approximately 13 percent of all mortgage loans originated.
If you’d like to read the whole proposal (I know you’re all just dying to) you can view it here.
Tags: risk retention proposal, QRM, Dodd-Frank, home loans, mortgage lenders, five percent retention, qualified residential mortgages